The Uneasy Case Against Occupational Licensing (Part 1)

Obama-era technocrats and Trump cronies may not agree on much, but they have made common cause against occupational licensing. That focus undermines important social objectives while obscuring far more important problems in the labor market. In this post, we cover the basics of licensing, and then reframe current attacks on it. In our next post, we will explain why licensing’s mix of consumer protection and labor market stabilization is a legitimate policy option for a wide range of occupations.

Licensing has an important role to play in protecting consumers from provision of unsafe or ineffective services. For example, medical treatment and legal representation are often credence goods, whose quality cannot be fully assessed by a layman. In other fields, even if the quality of work can be readily assessed, the risk of a terrible outcome (such as an untrained plumber accidentally deluging an entire apartment building) requires some state intervention to promote acceptable quality of service.

Critics of licensing question whether these benefits are worth the costs, which can include higher wages for licensed workers. Such an objection comes naturally to conservatives, who generally favor the interests of capital over labor. Among the progressives who attack licensing, the rationale is different. First, they worry that licensed labor is overpriced, squeezing consumers. Second, they point to the fate of workers too poor or too busy to obtain a license. Better, the progressive neoliberal might say, to have a plumbing market with 20% more workers making 20% lower wages.

These progressive neoliberal points need nuance. What’s particularly strange is that the high cost of specialist physicians is not usually in the sights of licensing critics. Rather, they tend to focus on lower-paid workers, such as hairdressers. But is it really so much better for the economy if there are, say, 100 hairdressers in a town making $10,000 a year, rather than 50 making $20,000? There is a reason licensing has begun to fill the vacuum left by right-to-work laws and other big business-led attacks on unions:*

As labor lost bargaining power relative to capital, one of the few ways to achieve some stability in supply was to assert a state interest in limiting entry to fields to the qualified. Raising wages and stabilizing employment are usually a plus from a macroeconomic perspective. It’s only the blinkered microeconomics of economism that obscures the need for some countervailing power against the rising dominance of capital.

Since the 1970s, institutional changes, such as the decline in unionization and increased employer-side concentration in labor markets, have tilted the balance of power decisively in favor of employers and against workers. In this landscape, barriers to labor market entry can give workers some degree of bargaining power that they would otherwise lack. Empirical research has found that licensing creates a significant wage premium, of a magnitude similar to the premium from unionization. Looking at one occupation, a recent study found some evidence that the de-licensing of barbers in Alabama in 1983 led to a decline in earnings for barbers and that their subsequent re-licensing in 2013 has increased wages.

Yes, that wage premium may raise wages to the detriment of current consumers. But it can also have dynamic benefits for consumers, as the prospect of higher income attracts more diligent and committed individuals to an occupation. Does that increase in quality “distort” markets? No. Licensing rules are not interventions against a backdrop of natural non-intervention. Law governing market structure is always a matter of determining which privileges and responsibilities one brings to potential exchanges. Moreover, as Mirowski and Nik-Khah have argued, there’s no one Platonic ideal called a “market.” It is appropriate for different rules to govern the sale of chewing gum, caskets, and pharmaceuticals. So, too, should diverse standards of quality apply to the diversity of services on offer in a modern labor market.

Once the implicit assumptions of the mainstream attacks on licensing are exposed, occupational licensing policy becomes much more complicated. In our second post, we will explore the types of values that should govern occupational licensing policy, to replace the economism of today’s dominant policy space.

* The chart is based on the empirical work of economist Morris Kleiner.

Frank Pasquale is professor of law at the University of Maryland Francis King Carey School of Law and Sandeep Vaheesan is legal director at the Open Markets Institute.